Raising the Bar and Lawsuits… A Thought

I know I haven’t been blogging, but hey… when you’re sitting on the beach in Aruba staring at gently lapping waves of turquoise waters, diving into the Interwebz isn’t real high on your list of priorities. Trust me on that. 🙂

I met Leigh Brown at HearItDirect/RETSO event in Atlanta, and thought she was energetic and not afraid to speak her mind (as you can see above).

But here’s the thing. Leigh equates more education with Raising the Bar (an ill-defined concept, I know, but one that most of us kinda ‘get’ in our guts). She asks what’s it gonna take.

What if the answer is something seemingly unrelated? What if the answer is a lawsuit currently making its way through the California court system? Let me explain.

2014 T3 Black Swan

Last year, at Stefan Swanepoel’s T3 Summit, I presented my second set of “Black Swans”. I couldn’t find the video of the 2014, though you can find the 2013 one on YouTube. One of those Black Swan items I presented — thinking it was completely unlikely (hence, a “black swan“) — was the idea that the independent contractor status of real estate agents would go bye-bye.

I thought that maybe a combination of Obamacare and politicians wanting to talk about “job creation” and various governmental units wanting to raise more revenues (aka, taxes) might lead to such a change.

Come to find out, that wasn’t such a black swan after all….

Bararsani v. Coldwell Banker

There is a case making its way through the LA County court system called Bararsani v. Coldwell Banker. (There is also a case in Alameda County, Cruz v. Redfin, which deals with the same issues.) You may have read about this from various media reports, not the least of which is NAR’s REALTOR Magazine. More details can be found in this Las Vegas Examiner story.

Basically, the plaintiffs (and the last bit of rumor/news I heard a month or so ago was that the court granted class action status… though that could be wrong) are alleging that they are not independent contractors, but employees, and should be reimbursed for business expenses (such as Association dues, MLS fees, etc. etc.) by the brokerage company (NRT, a division of Realogy).

Now, according to Joel Singer, CEO of California Association of REALTORS, the state of California apparently has laws on the books that specifically say that licensed real estate agents are statutory non-employees (mirroring 26 USC Section 3508 under federal law). So this should be a slam-dunk case, right?

Apparently not. The judge sided with the plaintiffs in a motion to dismiss the case, and now, the case is moving ahead to the discovery phase. And like I said, I had heard that class status was granted, but no confirmation on that.

So… C.A.R. went to the legislature of California and asked them to reaffirm the independent contractor law already on the books… and again, according to Singer, the legislature told them “No”. Well then.

If somehow the court finds for the plaintiffs here, and real estate agents are no longer independent contractors, the implications for real estate are… rather significant. Brokerages would suddenly have enormous carrying costs for all of their agents, not the least of which are various payroll-related taxes and fees.

This post isn’t about that case specifically, although perhaps we should delve into that further at some point. This post is about what I’ve heard from brokers over the past several months because of that case.

Would This Raise the Bar?

As one might expect, brokers are split on the impact of Bararsani: the large brokerages with enormous agent headcount think it’s of teh Devil. The small/mid-size brokerages, however, take a slightly more… ah… philosophical outlook.

One broker in California actually told me that he thinks making agents employees would be great, because it would finally give him management control. When there is no carrying cost to “hiring” an agent, his fear is that trying to control his agents would result in their leaving. If agents are employees, however, then competing brokerages would have to look at recruiting very differently, which would give him more ability to demand more from his agents.

Including, education — Leigh Brown’s pet peeve above.

But obviously, the entire way we think about agents and brokers changes under an employment model. The broker ends up paying through the nose to have agents working for him, but at the same time, they’re actually working for him, not the other way around. (Consider how often you hear brokers say things like, “I partner with my agents to help improve their businesses” or some such.)

Yes, the no-longer-independent-contractor thing would absolutely ruin MLS and Associations and large franchises and an enormous number of large companies. I’m no fan of such a thing, especially when the actual legislation on the books — y’know, the whole ‘will of the people’ thing — is against employer status for real estate agents, but…

That California broker wasn’t some weird wacko roaming in the wilderness. Most of the smaller brokerage owners I’ve chatted with about this think that it might actually be a net positive for the industry to have agents be employees. They’re certainly willing to cut the less productive and focus on their fewer, better (in their minds anyhow) agents, if the “big box shops” in town would have to do the same.

So… this entire post is a thousand-word question.

Would Bararsani v. Coldwell Banker, if it went against the industry, be the most significant Raise the Bar moment in recent memory?

Managing Partner of 7DS Associates, and the grand poobah of this here blog. Once called "a revolutionary in a really nice suit", people often wonder what I do for a living because I have the temerity to not talk about my clients and my work for clients. Suffice to say that I do strategy work for some of the largest organizations and companies in real estate, as well as some of the smallest startups and agent teams, but usually only on projects that interest me with big implications for reforming this wonderful, crazy, lovable yet frustrating real estate industry of ours.